Why is PI classification necessary?
There are several key reasons why PI classification is conducted:
- Licensing conditions – Some intermediaries are subject to licensing/registration conditions that restrict them to serving only clients who qualify as PIs. If you are subject to such a condition, you must ensure that your clients are limited to PIs.
- Product offering restrictions – The offering of investment products to the Hong Kong public is subject to restrictions under section 103 of the Securities and Futures Ordinance (SFO) and the prospectus regime under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, unless an exemption applies. One such exemption under both regimes is where the offer is made exclusively to PIs. Therefore, if you rely on the PI exemption when offering investment products to Hong Kong investors, you must ensure that the investors qualify as PIs.
- Exemptions from conduct and compliance requirements – Intermediaries are subject to various ongoing conduct and compliance obligations including, among others, those under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (CoC); the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules (CNR); and the Securities and Futures (Client Securities) Rules (CSR). Certain exemptions from these requirements are available when dealing with PIs. If you intend to rely on such exemptions, you must ensure that the clients qualify as PIs and meet the relevant additional criteria.
Why is this important?
There have been numerous PI-related court and SFC enforcement cases:
- In a recent SFC enforcement case,2 the SFC publicly reprimanded and fined an intermediary HKD 8 million for PI misclassification. The intermediary had misinterpreted the Securities and Futures (Professional Investor) Rules (PI Rules) in relation to (i) joint accounts held by accountholders who were not "associates" (as defined under the PI Rules), and (ii) joint accounts held by parents and children. As a result, the intermediary sold to certain non-PI clients products that were intended for PIs only and breached the compliance obligations under the CSR and CNR by erroneously relying on the exemptions applicable to PIs.
- In a leading Hong Kong case, an issuer relied on the PI only exemption under section 103(3)(k) of the SFO to issue advertisements promoting a collective investment scheme without obtaining SFC authorization.3
What is the definition of "PI"? How are PI assessments conducted?
The term "professional investor" is defined in Part 1 of Schedule 1 to the SFO and in the PI Rules.
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Who qualifies as PI? |
How is PI status assessed? |
| Institutional PI |
Exchanges, regulated banks, insurance companies, asset managers, government, etc. |
Public searches, obtaining supporting documents to evidence authorization status, etc. |
| Corporate PI |
- Trust corporation entrusted with total assets of HKD 40 million or more (see section 4, PI Rules)
- Corporation/partnership having (i) a portfolio (consisting of securities, certificates of deposits issued by banks and/or cash held with custodians) of HKD 8 million or more or (ii) total assets of HKD 40 million or more (see sections 6(a) and 7, PI Rules)
- Corporation whose principal business is investment holding and wholly owned by another designated PI (see section 6(b), PI Rules)
- Corporation that wholly owns a corporation referred to in item 2 above (see section 6(c), PI Rules)
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Supporting documents prescribed under section 8 of the PI Rules to demonstrate that the monetary thresholds are met.
Additional documents will be required for investment holding vehicles and companies held by another PIs to demonstrate shareholding relationship and nature of business.
If you intend to use other supporting proof, you must assess and apply professional judgment. Self-declarations are generally insufficient.
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| Individual PI |
In respect of any individual, a portfolio (consisting of securities, certificates of deposits issued by banks and/or cash held with custodians) of HKD 8 million or more held in one of the following manners:
- A portfolio on the individual's own account
- A portfolio on a joint account with the individual's "associate" (see Note 1)
- The individual's share of a portfolio on a joint account with one or more persons other than the individual's "associate" (see Note 2)
- A portfolio of a corporation that at the relevant date has as its principal business the holding of investments and is wholly owned by the individual
Note 1: Under the PI Rules, the term "associate," in relation to an individual, means the spouse or any child of the individual. For example, in relation to Mr. A, an associate includes Mr. A's spouse or Mr. A's child.
Note 2: In relation to an individual's share of a portfolio on a joint account with one or more persons other than the individual's "associate," this refers to either of the following:
- The individual's share of the portfolio as specified in a written agreement among the account holders
- In the absence of an agreement referred to in paragraph (a), an equal share of the portfolio
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Supporting documents prescribed under section 8 of the PI Rules to demonstrate that the monetary thresholds are met.
Additional documents will be required in relation to joint accounts to demonstrate (i) any associate relationships between the accountholders and/or (ii) the portion of share of portfolios held in the joint accounts with non-associates. Also, additional documents are required for portfolios held by personal investment holding vehicles to demonstrate shareholding relationship and nature of business.
If you intend to use other supporting proof, you must assess and apply professional judgement. Self-declarations are generally insufficient.
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To rely on the exemptions from the conduct and compliance requirements under specific regulations (e.g., the CoC or the CNR), additional criteria must be met beyond the basic PI assessment. Depending on the specific exemption, these additional criteria may include conducting further investor assessment, issuing a PI notice, obtaining consents from PIs, and performing annual confirmations.
Key takeaways
Observing PI assessment requirements is critical for intermediaries to ensure compliance with applicable licensing conditions, product offering restrictions, and relevant exemption requirements. Non compliance may result in serious consequences, including regulatory enforcement action and/or litigation. Given the intricacies involved in PI classification, please feel free to contact us if you have any questions on this topic.
1 https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=25PR167
2 https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=25PR167
3 SFC v (1) Pacific Sun Advisors Limited and (2) Mantel, Andrew Pieter, FACC 11 of 2014 dated 20 March 2015.
